Powell talks tough, warning rates will remain high for some time

(Bloomberg) — Federal Reserve Chairman Jerome Powell noted that the U.S. central bank is likely to continue raising interest rates and leave them high for a while to tame inflation, and pushed back against any notion that the Fed will soon reverse course.

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“Restoring price stability will likely require maintaining accommodative policy for some time,” Powell said Friday in remarks prepared for the Kansas City Fed’s annual policy forum in Jackson Hole, Wyoming. “The historical record strongly warns against premature easing of policy.”

He said getting inflation back to the 2% target was “the central bank’s main focus at the moment”, even though consumers and businesses would feel financial pain. He reiterated that another “unusually large” increase in the benchmark lending rate could be appropriate when officials meet next month, though he stopped short of committing to one.

“Our decision at the September meeting will depend on the totality of incoming data and the evolving outlook,” he said.

Two-year yields on the bond. rose as investors digested the remarks, reaching 3.44%, while the 2- to 10-year yield curve continued to flatten. Stocks were lower.

“In one line: Nothing for doves,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a note to clients. “The Fed cannot relax until inflation is clearly back on target and wage growth has slowed significantly. The chair’s message today is that the Fed believes these conditions are unlikely to be met as markets expect.”

Before Powell’s speech, investors saw the odds of a half-point increase or another three-quarter point increase at the Sept. 20-21 Fed meeting as roughly even. They remained in that range after his speech, but the amount of Fed rate cuts for 2023 retreated briefly.

Force Action

“Restoring price stability will take some time and requires aggressive use of our tools to better balance demand and supply,” Powell said in remarks that were to be broadcast live for the first time from inside the facility. where the event took place. since 1982.

Other Fed speakers in recent days also pushed back expectations that the Fed would quickly ramp up to a tightening policy and then begin to ease.

Restoring price stability will require a “sustained” period of below-trend growth and a weaker labor market, Powell said. “While higher interest rates, slower growth and softer labor market conditions will reduce inflation, they will also bring some pain to households and businesses,” he said.

Powell’s remarks at the retreat, which brings together top politicians from around the world, come as US central bankers grapple with the highest inflation in 40 years. Officials were slow to spot the danger and are now moving aggressively to prevent prices from accelerating further. Officials raised rates by 75 basis points at their last two meetings and indicated that the same could be on the table again when they meet next month.

Critics criticized the Fed for failing to anticipate the rise in inflation, which the Fed initially saw as temporary. Powell told the conference in his speech a year ago that price pressures were limited to a relatively narrow group of goods and services. But within months it spread, and by the time the Fed started raising interest rates from near zero, inflation was already three times the 2% target.

Remains high: While the Fed’s preferred measure of inflation eased to 6.3% for the 12 months ended in July, wages and salaries had their biggest monthly rise since February, according to a government report released earlier Friday.

“While the lower inflation reading for July is welcome, the one-month improvement falls far short of what the committee would need to see before we can be confident that inflation is moving lower,” the Fed chief told the audience, gathered in person after two years. holding the conference essentially due to the pandemic.

“We are deliberately moving our policy to a level that will be restrictive enough to return inflation to 2%.

Fed officials in June forecast interest rates would rise to 3.4% by the end of this year, according to their median estimate, and to 3.8% by the end of 2023. They will update those forecasts in September. Investors have priced in the possibility of cuts in the second half of 2023, although Fed officials are beginning to push back against that view.

Looking beyond the current rate hike cycle, policymakers are trying to assess whether long-term inflationary pressures will remain persistent. Supply chain costs may be shifting higher, and US labor supply could remain tight for years to come due to an aging population and limited immigration.

Powell said the labor market is “clearly out of balance” with demand for workers “substantially” outstripping supply.

The US unemployment rate hit a five-decade low of 3.5% in July as wages fully recovered to pre-pandemic levels.

Ahead of Powell’s speech, several Fed officials emphasized that the central bank is by no means done, with Kansas City Fed President Esther George noting that the target for the federal funds rate may be higher than ,what markets are currently priced at.

“We need to raise interest rates to slow demand and bring inflation back to our target,” said George, who votes on monetary policy this year.

Financial markets have the key lending rate peaking below 4% early next year.

Asked how high the Fed should push borrowing costs, George said there was “more room to go” and pushed back against bets in financial markets that the central bank will start cutting interest rates next year.

“I think we should hold — it could be over 4%. I don’t think that’s out of the question,” she said in an interview with Bloomberg TV. “You won’t know that, I think, until you start tracking the data signals.”

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